Criminal gangs push VAT fraud losses up to £7bn

The public is being swindled out of £7bn by fraudulent VAT claims organised by criminal gangs, according to a new estimate - a figure far higher than previously thought.

Analysis by the PCS civil servants' union also shows that suspected VAT 'carousel fraud' is being made worse by the steep job cuts Gordon Brown has imposed on the Revenue and Customs. 'Carousel' fraud occurs when goods are imported free of tax, passed along a chain with VAT added and exported. This, argues the union, is making it almost impossible for officials to deal with a problem which is beginning to make severe dents on public finances.

The Office of National Statistics last week pointed out that carousel fraud is bogusly inflating official export figures.

The PCS claims that the number of visits to businesses made by compliance officers has dwindled dramatically, making it far easier for VAT fraud to be perpetrated. The problem is causing concern at Westminster, with questions now being levelled at Labour's ability to manage key public functions.

Vincent Cable, the Liberal Democrat Treasury spokesman, said: 'This is appalling mismanagement. The government revenue forecasts, which are optimistic, depend on tough action to prevent fraud. But what Labour is doing with staff administration cuts defeats the object. It's being penny wise but pound foolish.'

There are claims from civil servants that a small Customs team working on fraud cases worth pounds 100m each month requested clerical support to help photocopy weighty documents but were denied because of budget restrictions.

Last week, the Office of National Statics said some pounds 5bn was being sucked out of Customs coffers by fraudulent VAT claims. The Treasury this weekend said it was doubling the team of 500 people devoted to cracking carousel fraud; it disputes the ONS's figure of pounds 5bn.

Some traders in the carousel fraud chain disappear without handing the VAT to Revenue and Customs while others reclaim it at the point of export before re-importing the goods to travel back around the chain. New figures show that the amount of carousel fraud had risen 500 per cent in the past 12 months.

There is anger among civil servants that while there is awareness of this crime, over the past five years the problem has worsened. Morale at the Revenue is said to be plummeting and there are suggestions that the Revenue and Customs boss, David Varney, is encountering management problems. The former MM02, Shell and British Gas executive was appointed head of the newly merged organisation two years ago.